IN THE HIGH COURT OF ZAMBIA
2006/HN/330
HOLDEN AT NDOLA
(Civil Jurisdiction)
BETWEEN:
PEMBA LAPIDARIES
1ST PLAINTIFF
LAPEMBA TRADING LIMITED
2ND PLAINTIFF
AND:
INDUSTRIAL CREDIT COMPANY LIMITED
CORAM:
DEFENDANT
SIAVWAPA J.
FOR THE PLAINTIFFS:
MRS. MWAPE OF MESSRS J.B. SAKALA &
CO
FOR THE DEFENDANT:
MR. CHILESHE OF
JONES & COLLINS
J
U
D
G
M E
N
MESSRS
T
AUTHORITIES AND REFERENCE SOURCES REFERRED TO
1. Halsbury’s Laws of England 4th edition Volume 32
2. Online Business Dictionary
3. The Free Online Legal Dictionary
4. Re Molton Finance Limited [1967] 3 ALL ER 844 (C A)
LLOYD,
The Plaintiffs herein are both bodies corporate incorporated in the Republic
of Zambia with their registered offices in Ndola.
By their joint writ of summons dated 29th November 2006, their claim
against the Defendant is for the followings reliefs;
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Damages for trespass to and or conversion of the Plaintiffs’
properties, plant, equipment and chattels at the premises known
as subdivision H10 of farm No. 748 NJO at Ndola which items
were not subject of the leased equipment which the Plaintiffs
obtained from the 1st Defendant
Loss of business arising out of (1) above
Damages for denying the Plaintiffs the equitable right to redeem
the mortgage on subdivision H10 of farm No. 748 Ndola the
property of the 2nd Plaintiff which was mortgaged to the 1st
Defendant
In the alternative an order for the return of the mortgaged
property and all the movable assets of the Plaintiffs
Damages for selling the mortgaged property and the leased
equipment at under valued prices
An account stated after the sale of the mortgaged property to two
purchasers and the leased and un leased assets to the 2nd
Defendant
Any other relief or order as the Court may deem equitable
Interest and costs
The brief facts of the case are that in April and May 2001, the 1st Plaintiff
and the 1st Defendant entered into two Lease Agreements by which a
number of pieces of plant and equipment were leased out by the Plaintiffs
to secure the loans obtained from the 1st Defendant. The property known
as subdivision H10 of farm No. 748, belonging to the 2nd Plaintiff was used
as additional security to both leases.
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The 1st Defendant accordingly advanced certain sums of monies to the 1st
Plaintiff but that the 1st Plaintiff defaulted leading to the foreclosure on the
property known as subdivision H10 of farm No. 748 which property the 1st
Defendant sold to recover the monies due on the leases. In the process
other movable properties belonging to the 1st Plaintiff were sold and it is on
these brief facts that the Plaintiffs have founded their claim.
I need to mention that in due course, even before commencement of trial
the parties, by consent had the 2nd Defendant removed from the
proceedings thereby leaving the 1st Defendant as the sole Defendant in the
matter.
The Plaintiffs’ sole witness and the only witness called in the case, Mr.
Mulenga Kasenge Kaoma, who was the 1st Plaintiff’s Administration
Manager from 1999 testified that between 10th and 17th April 2001, the 1st
Plaintiff decided to seek a loan or a lease back of its equipment to raise
working capital. Subsequently, he and the technical director approached
the 1st Defendant where they had a fruitful discussion with one Cosmas.
They submitted an application in which a Mitsubishi Rodeo motor vehicle, a
Power ware UPS and three Imahashi Faceting machines were leased out to
the 1st Defendant for a sum of US $ 45, 000.00.
On 27th April 2001, he collected a cheque for US $ 42, 120. 00 as the 1 st
Defendant had collected US $ 2, 880.00 from the sum of the lease. He said
that as at 19th April 2002, the amount due to the 1st Defendant was US $
41, 315.00.
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On 23rd May 2001, another application was lodged with the 1st Defendant
for a sum of US $ 150, 000.00 as the earlier amount was inadequate to
enable the 1st Plaintiff to participate in the Hong Kong International
Gemstone fair scheduled for August/September 2001. He said that on the
second application, the 1st Defendant only gave them US $ 100, 000.00
with a promise that the balance would be paid in due course. He collected
a cheque for US $ 93, 600.00 following the 1st Defendant’s collection of US
$ 6, 400 as its management fees.
He said that because the 1st Defendant failed to pay the US $ 50, 000.00
on the second lease, the 1st Plaintiff failed to attend the fair in Hong Kong
as it had difficulties in sourcing for raw materials and subsequently also
failed to pay back the 1st Defendant. He further said that the total balance
on the two leases due for payment as at 16th January 2004 was US $ 93,
854.78.
He also explained that because the 1st Defendant had no property, it was
conducting its operations on subdivision H10 of farm No. 748 belonging to
the 2nd Plaintiff, a sister company to the 1st Defendant, which property was
also used as additional collateral for the two leases. He said that they were
shocked to learn that the said property had been sold to one Olga Morelli
in 2003 for US $ 60, 000.00 without the knowledge of the 1st Plaintiff and
without a letter of demand from the 1st Defendant as per procedure of
financial institutions.
He said it was wrong for the 1st Defendant to force Mr. Neils Erickson to
sign a letter exhibited at pages 24 and 25 in the Plaintiff’s supplementary
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bundle of documents when the property had already been sold and the
leases paid out by the US $ 60, 000.00 paid by Mrs Morelli which the 1st
Defendant did not credit to the account of the 1st Plaintiff to reduce on the
balances on the two leases.
He further said that the 1st Defendant under valued the property as it had
been purchased for US $ 79, 800.00 in 1997 and that extensive
renovations were carried out at a cost of US $ 119, 000.00. In that regard
he said that the 1st Plaintiff had suggested through a letter to Messrs Lloyd
Siame and company that the property could only be sold for US $ 200,
000.00. Further, he said that the 1st Defendant, on 6th August 2004,
foreclosed the 1st Plaintiff’s business without any demand letter or court
order and impounded machinery which was not leased including spare
parts, loose tool, office equipment, furniture, fittings, lapidary tables, cut
and polished stones and raw materials.
He said that the current value of the stones that were lost in the custody of
the 1st Defendant was US $ 259, 869.00 and that had the 1st Defendant not
foreclosed the 1st Plaintiff’s property the 1st Plaintiff would have earned US
$ 550, 000.00 from confirmed orders. He further said that the equipment
sold to Mr. Phesto Musonda for US $ 45, 000.00 was valued at US $ 636,
872.00 and that its current value was US $ 796, 090.00.
He contended that the 1st Defendant and Mr. Phesto Musonda entered the
property known as subdivision H10 of farm No. 748 without the knowledge
or consent of the 1st Plaintiff and that the 1st Defendant allowed Mr.
Musonda to start using the machinery which was not leased causing
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business loss to the 1st Plaintiff in the sum of US $ 1, 049, 620.00 annually.
He said that on 2nd March 2006, Olga Morelli obtained a court order to evict
Mr. Musonda and that in the eviction process, all the equipment, furniture
and fittings were dumped outside the building and rendered useless.
It was his further contention that, six years since the 1st Plaintiff lost
business it would be impossible to rebuild its previous reputation in the
stone business.
In cross-examination, he said that the Plaintiffs were sister companies with
the same directors and that the 1st Plaintiff borrowed the money
voluntarily. He denied the suggestion that the 2nd Plaintiff was owned by
the 1st Plaintiff. He however, conceded that in a leasing agreement the
borrower offers a chattel for sale to a financing company thereby
transferring the ownership and title of the chattel to the financing company
in return for cash.
He also admitted that there was a binding contract between the 1st Plaintiff
and the 1st Defendant exhibited at pages 15 and 16 of the Plaintiffs’ bundle
of documents with page 16 being the additional security of subdivision H10
of farm No. 748 which was owned by the 2nd Plaintiff. He said that the
lease period was 24 months from 23rd April 2001 to 24th April 2003 but that
the 1st Plaintiff defaulted. He further said that the 1st Plaintiff also defaulted
on the second lease of US $ 100, 000.00. He further admitted that the
second lease carried personal guarantees by the 1st Plaintiff’s directors who
were equally in default at the end of the lease period.
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He also said that there was an outstanding amount of US $ 115, 719.63 as
at 20th April 2004. He went on to admit that the signing of the document at
page 24 of the Plaintiff’s bundle of documents was in the interest of the 1st
Plaintiffs and its directors as it released them from the obligations under
the lease. He said that nobody had offered more than US $ 60, 000. 00 for
subdivision H10 of farm No. 748 and that at the date of the sale agreement
for the property, the Plaintiffs and their directors were three months in
default of the Lease Agreements and that the 1st Defendant was at liberty
to enforce its equitable mortgage.
He admitted that there was nothing wrong with the sale agreement as the
1st Defendant was exercising its rights over the property and further that
had the sale of the building failed the 1st Defendant would have been
entitled to sell the leased equipment and in the last resort, move against
the Plaintiffs’ directors personally.
With regard to the proceeds of the sale of the property, he said that the
recipients of the money were Messrs Lloyd Siame and company and that
there was no evidence to show that the 1st Defendant had received the
money.
As regards the value of the property he admitted that the US $ 200, 000.00
was fixed by the Plaintiffs and that a year later, Mr. Neil Erickson accepted
the value of the property as US $ 60, 000.00. He also said that according
to his letter, he handed over the keys to the property voluntarily. He
admitted further that the 1st Defendant recovered only US $ 45, 000.00
from US $ 55, 000.00 and declared no further claim from the Plaintiffs. He
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further conceded that the property in question was sold with the
knowledge of the Plaintiffs.
At the close of the case for the Plaintiffs, Mr Chileshe indicated that rather
than call witnesses, he would file written submissions on the law as the
facts were not in dispute. Unfortunately however, no submission was
received from Mr. Chileshe.
In her submission, Mrs Mwape said that the facts of the Lease Agreements
was not in dispute save for the procedure the 1st Defendant used to
recover the monies owing on the leases upon the Plaintiffs’ default. In this
regard, she argued that it was irregular for the 1st Defendant to foreclose
the Plaintiffs’ property without having issued a demand notice or obtained
a court order. She further argued that a mortgagee must give notice or
obtain a court order before foreclosing to give the mortgagor an
opportunity to redeem the mortgage. She referred the Court to Halsbury’s
Laws of England 4th Edition, Volume 32 at paragraphs 407, 571 and to the
learned author of A Short Treatise on Mortgages.
It was also argued that it was irregular for the 1st Defendant to impound all
the equipment including those that were not leased and further that when
the property was first sold, the proceeds were not credited to the Plaintiffs’
account.
As admitted by Mrs. Mwape in her submissions, there is no dispute that the
Plaintiffs and the 1st Defendant executed two financing Lease Agreements
and that the Plaintiffs defaulted on both Leases. What is in dispute is
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whether the 1st Defendant’s method of enforcing its rights on the Leases
was contrary to the law.
The two Agreements namely; USD/ME/290/27 dated 27th April 2001 and
USD/ME/305/15 dated 15th June 2001 have similar provisions except as to
the value and the equipment leased. In both Leases however, an equitable
mortgage was created in favour of the Defendant on subdivision H10 of
farm No. 748 Kabelenga Avenue as additional security. It is further noted
that both Leases had durations of 24 months with rentals due monthly in
advance.
In a nutshell the nature of the two Leases was such that the 1st Plaintiff,
being in need of working capital, sold off some of its equipment to the
Defendant for US $ 45, 000.00 and US $ 100, 000.00 respectively.
Subsequently, the Defendant leased back the said equipment to the
Plaintiff at fixed monthly rentals for a period of 24 Months (Clause 10.0
refers).
Clause 12.0 empowers the lessor to repossess the leased equipment
without giving notice or doing anything else in the event of default by the
lessee on the rentals or any other sum due within five days of the same
becoming due thereby bringing the lease to an end. Notwithstanding that
the Defendant neither called witnesses nor filed in submissions, it seems
clear from Mr. Chileshe’s line of cross-examination of the only witness for
the Plaintiffs that the Defendant placed heavy reliance on clause 12.0 for
its actions and I do not find fault in the Defendant’s actions as they relate
to the leased equipment.
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There is however, the issue of the foreclosure on the property that was
used as additional security and it had been argued that the foreclosure was
irregular as no demand notice or court order was issued and the mortgagor
was not given an opportunity to redeem the loan. The court was referred
to paragraphs 407 and 571 of Halsbury’s Laws of England Volume 32 4th
edition and the learned authors of Short Treatise on Mortgages.
I have taken time to look at the cited authorities and other references on
the effect of an equitable mortgage and what is clear from the said
authorities and references is that an equitable mortgage does not convey
legal title to the mortgagee. It is said to be imperfect and not meeting the
requirements for a legal mortgage thereby requiring an agreement to make
it perfect.
According to the online Business Dictionary, in English Law, “an
equitable mortgage is created by the deposit of title deeds by the owner of an estate
with a person from whom he has borrowed money with an accompanying
agreement to execute a regular mortgage, or by the mere deposit, without any
verbal agreement respecting a regular security.” It goes on to state that; “where
a legal or equitable mortgage is the security interest created or arising under
security financial collateral arrangement on terms that include a power for the
collateral taker to appropriate the collateral, the collateral taker may exercise that
power in accordance with the terms of the security financial collateral arrangement
without any order.”
The above cited quotations make it undoubtedly clear that an equitable
mortgage must be accompanied by an agreement or a provision that
empowers the collateral-taker or mortgagee to either execute a legal
mortgage or to appropriate the collateral without which legal title remains
with the mortgagor and the mortgagee is devoid of any power to
appropriate or effect a foreclosure on the property without a Court order.
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I am fortified in taking the above position by the following definition of
foreclosure from the Online Business Dictionary;
“Strict foreclosure refers to the procedure pursuant to which the Court
ascertains the amount due under the mortgage orders its payment within a
certain limited time and prescribes that in default of such payment, a debtor
will permanently lose his or her equity of redemption, the right to recover the
property upon payment of the debt, interest and costs. The title of the
property is conveyed to the creditor on default of payment, without any sale
of the property.”
It is therefore, the position at law that an equitable mortgage creates a
charge on the mortgaged property that gives the mortgagee or creditor the
right to seek the aid of the judicial process to recover the loan in the event
of default. This is in accordance with paragraph 405 of Halsbury’s Laws of
England Volume 32, fourth edition at page 189 which states as follows;
“An equitable mortgage is a contract which creates a charge on the property
but does not convey any legal estate or interest to the creditor; such a charge
amounts to an equitable interest. Its operation is that of an executor
assurance which, as between the parties, and so far as equitable rights and
remedies are concerned, is equivalent to an actual assurance, and is
enforceable under the court’s equitable jurisdiction.”
In Re Molton Finance Limited the Court of Appeal put it thus;
“When an equitable mortgage or charge is created by deposit of title deeds
there is an implied contract that the mortgagee or charge may retain the
deeds until he is paid.”
This means that a mortgagee can hold on to the title deeds until the
payment of the debt but without power to dispose of the property until and
unless a court order for foreclosure is obtained. To underscore this position
in the United States of America, three operative theories have emerged
namely; the lien theory, the title theory and the hybrid theory applied by
different States.
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In the States that apply the lien theory, a mortgage is treated as an
instrument granting security rights to the lender with the legal title
remaining with the borrower at all times. In these states, the lender will
usually resort to a judicial foreclosure and obtain a court order authorising
the sale of the property to satisfy the debt. On the other hand in States
that apply the title theory, a borrower transfers the legal title to the lender
who holds it in trust for the borrower under a deed of trust. In these
States, foreclosure is non judicial as the lender already has legal title.
In States that apply the hybrid theory, title is transferred to the lender
through a mortgage rather than a deed of trust with non judicial
foreclosure still acceptable. This hybrid theory in the United States is more
or less what is called a legal mortgage under the common law system.
Transcending all these theories however, is the borrower’s right of equity
of redemption and to that effect, Mrs. Mwape has argued on behalf of the
Plaintiffs that the Defendant acted in breach of the Plaintiffs’ right to equity
of redemption when it purportedly foreclosed on the property in Kabelenga
Avenue.
As already seen from the references and authorities cited earlier, an
equitable mortgage does not convey any legal title in the mortgaged
property to the mortgagee and consequently no power of sale vests in the
mortgagee. Further, paragraph 407 of Halsbury’s Laws of England Volume
32 fourth edition at page 190, attaches the equity of redemption to all
mortgages and provides among other things that;
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“Any provision inserted in the mortgage to prevent redemption on payment of the
debt or performance of the obligation for which the security was given is termed a
clog or fetter on the equity of redemption and is void.” It goes on to state that;
“The right to redeem is so inseparable an incident of a mortgage that it cannot be
taken away by an express agreement of the parties that the mortgage is not
redeemable or that the right is to be confined to a particular time or to a particular
description of persons.”
In this case, the two Agreements that the parties signed were lease-backs
of equipment by the Defendant and the assets specified in the schedules to
the two Agreements formed the core of the security for the Defendant. The
property referred to as H10 Kabelenga Avenue, which is at the centre of
the dispute, was used as additional security by way of creating an
equitable mortgage over it for both Agreements. The equitable mortgage
was created by a deposit of title deeds of the property with the Defendant.
There was no deed of trust executed by the parties over the said property
effectively leaving the legal title to the property with the 2nd Plaintiff at all
times.
On the basis of the law relating to equitable mortgages discussed above, it
follows that the Defendant had no power to foreclose the property without
having recourse to the judicial process and obtaining a court order. I
therefore, accept Mrs Mwape’s argument that the Defendant acted
irregularly by foreclosing on the said property and subsequently selling it
without first obtaining a court order.
I further wish to point out that in its purported foreclosure on the property,
the Defendant can not rely on the provisions of the two Agreements and in
particular clause 12.0 as the said Agreements apply solely to the
equipment which was subject of the lease-backs and not the property in
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issue which was to be governed solely by the law governing equitable
mortgages which has already been sufficiently exposed in this judgment.
As regards the equity of redemption, there is again no doubt that by selling
the property to a third party without a court order, the Defendant seriously
violated the 2nd Plaintiff’s right to the equity of redemption which, as
already stated, is non negotiable as it is incidental to any mortgage created
and more so an equitable mortgage which does not convey any legal title
to the lender.
Finally, there is the claim based on the sale of other equipment and various
quantities of both polished and raw precious stones of various types which
were not subject of the lease-back Agreements. This appears to me to be a
serious misapprehension of the law relating to collateral on the part of the
Defendant. I take this view because, security taken by way of a lease-back
attaches specifically to the items listed and scheduled. Default on the part
of the lessee can never entitle the lessor to cease other items that are not
attached to the lease. It was therefore, a gross violation of the Lease
Agreements themselves for the Defendant to cease and sell the items that
were not part of the Lease Agreements.
I therefore, find that because of the erroneous sale of the Plaintiffs’
properties which were not part of the Lease Agreement, the Plaintiffs’
business was made to suffer serious damage from which they might never
recover
On the totality of the evidence before me, I cannot but find in favour of the
Plaintiffs and award them the following;
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1. Damages for loss of the property known as subdivision H10 of farm
No.748 in Kabelenga Avenue
2. Damages for all the equipment and materials that were sold by the
Defendant not being part of the Lease-back Agreements
3. Damages for loss of business
The above awards shall be assessed by the Deputy Registrar with interest
and costs to follow the event.
DATED THE------DAY OF JANUARY 2011
J.M. SIAVWAPA
JUDGE
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